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What is the initial outlay for this project?

Use the following information to answer Questions 4 to 6.

Lamina Concrete Berhad is considering the purchase of a new concrete mixer. If purchased, the new mixer will cost RM90,000 plus RM7,000 in installation costs. To finance the mixer, the firm will borrow all the money and the interest on this debt will be RM10,800 per year. In addition, it will result in additional accounts receivable of RM16,000, additional inventory of RM18,000, and additional accounts payable of RM14,000. At the end of year 5 it can be sold for RM20,000 to a secondhand dealer. To date you have spent RM38,000 researching the venture and performing feasibility studies regarding this mixer. The mixer will be depreciated to 0 over 5 years using the simplified straight line method. Lamina expects the revenues attributable to the mixer to be RM45,000 per year. Direct costs including maintenance and materials will be 60% of revenue for the next 5 years. However, it is also expected to generate annual savings of RM40,000. Lamina’s marginal tax rate is 30% and assumes the WACC is 14%.

4. What is the initial outlay for this project?

A. RM97,000

B. RM115,000

C. RM117,000

D. RM155,000

5. What are the annual (operating) cash flows from year 1 to 4?

A. RM38,440

B. RM38,860

C. RM46,000

D. RM46,420

6. What is the terminal cash flow at year 5?

A. RM34,000

B. RM60,420

C. RM72,860

D. RM80,420

7. Calculate the project’s NPV. Is buying this machine a good investment?

A. Yes because of positive NPV= RM60,024.10

B. Yes because of positive NPV =RM84,134.65

C. No because of negative NPV= RM-49,024.60

D. No because of negative NPV= RM-88,033.65

Solution:

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